Question

State whether the following statements are true or false.

1) Any year can be taken as the base year.

2) There are no limitations of index number.

3) Index number is an economic barometer.

Answer 1

1. This statement is false.
Explanation
The base year is the year in relation to which the changes in the current year are measured. However, not all years can be taken as the base year. It is only the normal years that can be taken as base year. The two basic requirements for a year to be base year are:

i. It should be free from major fluctuations in the economy.
ii. It should not be too far from the current year.

2. This statement is false.
Explanation
An index number has several limitations. The following are some of the limitations of index number-

i. Affected by sampling errors- Index numbers are based on samples, as all items cannot be included. Thus, they are easily affected by sampling errors.
ii. Data may be biased- The construction of index numbers is based on samples and data collected, which may be biased in nature. This can affect the index numbers.
iii. Restricted scope- As index numbers are specialised averages, they are created for specific or unique purposes. Due to this, the scope of an index number is limited to a particular use.
iv. Can be misused- Index numbers can be misused in the sense that the investigator in order to prove a particular point may chose a base year as per his bias. This would give misleading results.
v. Defective formulae- Index number is only an average thereby, suffers from all the limitations of an average. Each of the formula of index number has its own limitations.
vi. Ignores qualitative changes: In the construction of quantity or price induces qualitative changes in the commodities are ignored. It may happen that the rise in the price is due to an improvement in the quality, but the price index ignores this fact.

3. This statement is True.
Explanation
Index numbers are used to measure economic performance and other economic variables of an economy, such as price and cost of living, with reference to different time periods, location, characteristics, etc. So, index numbers are said to be the economic barometers of a country.